A Baby Boomer looks at health, finance, retirement, grown-up children and ... how time flies.

Tuesday, April 12, 2011

Building a Case for the Next Housing Boom

I'm guessing that most of us Baby Boomers, and people who are older, own our own homes, and have watched with dismay as their value plummeted over the last few years -- forgetting, of course, that before 2007 we were benefiting from the generation-long increase in prices. I bought my first house in 1977 for $79,000, and sold it five years later for more than twice the price. And for many years after that I would joke (but it was true) that because I got in "early" I lived in a house that I could never afford on the salary I was making.

Housing prices went up from 1990 (and long before that) until 2006; since then they have fallen to 2004 levels

That's cold comfort to anyone who bought at the top in 2006 or 2007. But as the above graph shows, anyone who bought before 2004 is still "in the money."

That's just to remind you that despite the recent decline, for most of our lives owning a house has been a good investment, and has allowed us to enjoy better living accommodations than if we'd been renting, and at a much lower price. Okay, renting has been a "good deal" for the past few years ... but if you think about it, how could renting possibly cost less in the long run? A landlord is not going to rent a place to you for less than what it costs him or her -- and it's the landlord who gets all the tax breaks on top of that.

So I'm making my bold prediction -- the real estate market is bottoming, either this year or next, and then we will see the market get back on its inflationary track, and prices will improve for ... literally, the rest of our lives.

Why?

For one thing, as shown in the graph below, affordability has improved dramatically. Mortgage rates (if you can get the loan) are low. Real estate taxes have leveled off after many years of increases. And of course prices have come down by 20 to 50 percent. It's like the stock market in March 2009 -- the future looks murky, but prices are so low that if you have any faith that America will grow and prosper, even at a modest pace, then it's got to be a good deal.

A value of 100 in this chart means the average family has exactly enough income to qualify for a mortgage on the average home. Current value is 191, meaning the average family has almost twice what it needs to qualify for the mortgage

A second reason is demographics. The prime age for first-time home buyers is 30 - 35 years old. And recently, there's been a paucity of people in that age group. But soon there will be a lot more.

Brief history lesson. During the Baby Boom, the number of births peaked in 1957. A little more than 4.3 million Americans were born that year. Then births went down slowly until 1964, the last year births were over 4 million. It's no coincidence that there was a housing boom approximately 30 - 35 years later, when all these babies were grown up and ready to buy a house. But after 1964 births continued to go down, until they hit bottom from 1973 through 1976, when births in the U.S. were below 3.2 million. A million fewer prospective home buyers. And when you add 35 years to 1973, you get 2008, when the real estate market was falling out of bed.

But after 1976 births started going up again, as the original Baby Boomers started having children. Births were up to 3.6 million by 1980, and back over 4 million starting in 1989. Add 35 years to 1980, and you get 2015 -- when all the "echo boomers" will be looking to get into the residential housing market for the first time. Of course, it's a long time between birth and home buying, so the correlation isn't perfect, but there's no denying, more births mean more future home buyers.

The rate of home ownership in the U.S. peaked at over 69 percent in 2004; since then it has declined and is currently at 66.5 percent -- the same as 1998

Finally, we have to consider shifting attitudes about how, when and if people want to buy a house, as opposed to renting an apartment or living in their parents' attic, or their kid's basement. (Remember Arthur in the TV show "The King of Queens," Carrie's father who lived in the Heffernan basement? Makes for great comedy, but you don't want to be him in real life if you can help it.)

The graph above clearly demonstrates that buying a house was the "thing to do" in the late 1990s and early 2000s, and it has been going out of fashion since 2004. And if there's one thing we know about fashion it's like what Mark Twain said about the weather in New England -- if you don't like it, just wait a few minutes and it will change.

There's only one way all these graphs don't turn around, and that's if America is in a permanent state of economic and population decline. While that's possible -- and given recent news I wouldn't even blame anyone for believing that -- I don't think it's really true. So to me, the only question is not "if" the residential housing market will improve, but "when."

Do you remember the last housing crisis in the mid 80's? That's when I bought a home. It was worth $250K then and I got it for $135K. 16 years later I sold it for $500K and today, even now with the current housing slump it's worth $700K (down from $900K at the top of the prime in 2007-2008).

Hold on. Even if it's for decades. If you don't own a home yet, try and get one. And hold on very tight. This is going to be a very long and bumpy ride.

Great post. I managed to get lucky with the housing boom also. Actually twice but the ex-wife grabbed the first one from me. I moved around a lot in the 80's and 90's and I hated to rent. Unlike the first commenter, I think renters only subsidize the landlord, not anyone else. Out of that rent, the landlord pays the mortgage, the maintenance, the insurance, and the taxes. But I bought a home for $110 in 1993, added a $22k pool and cage in 1998. And sold the house in 2007 for $360k. The net profit paid for my current house (which I had had built in an area that had not been caught up in the bubble quite yet) so now I live free of mortgage payments. It worked for me only by luck. I feel sorry for those who bought late in the "bubble" (including the people who purchased my home) but it was obvious that it was a bubble by then and that it had to pop soon.

They say it's all about timing but that timing takes a bit of luck too. You are right that things will turn around and housing will increase in value. This is not a bad time to buy if you have a down payment saved and can qualify. We are at the bottom (or close to it) of the slump. The increase in price now should be slow and steady but you never know. Life is a gamble, isn't it?

I hope for the sake of those who bought homes at peak prices that housing will take an upturn again. But, as you said, so much will depend on economic recovery and people having the confidence to make such an investment. It can be a good investment if one doesn't try to buy more house than they can easily afford. My husband and I bought our first house in 1981 for $120,000. We were adamant about two things: that we would be able to afford the mortgage on one income if need be (because I was a full-time freelance writer at the time) and that it should be a nice enough house that we wouldn't mind living in it for the rest of our lives. We did live in it for 29 years. At peak prices in about 2006, the on-paper value of the house was $600,000. Prices fell steadily from there. A year ago, we sold it for $400,000. After paying off the mortgage, we were able to pay cash for a larger, nicer home here in Arizona and live mortgage free, which is a wonderful thing in retirement. To do this, we had to leave California, which we didn't mind doing. Even with the drop in prices, we still realized a considerable profit because we stayed put so long. I really feel for people who bought later. There are a number of people here in this community who bought at much higher prices in 2006 and are now trying to sell in a down market. I do hope prices stop their free-fall soon. (In our old neighborhood, prices have fallen another $50,000 on the average just in the last year.)

It's a bit different here in Vancouver. My daughter bought her house six years ago for $400,000 and it is now assessed at $800,000. It could actually sell for more. Canada's economy seems to be doing okay, for some strange reason. :-)

Interesting post with good statistics. Your opinion that the housing market will improve in the U.S. is sound, but I think the improvement will be slow over a very long time unless we are silly enough to return to the same practices that created the latest bubble.

Allowing young folks to become home owners by granting big mortgages with no down, or very little down, was a huge mistake. Let's hope our lenders and politicians put that behind them and return to the "20 percent down" days. It will be tough medicine to swallow, but it needs to be taken.

Our housing profiteers--real estate agents and financial institutions--also need to realize that the whole game may have changed. Major corporate employers no longer provide any security for employees, and the employees return the favor with no loyalty to the companies. People are more mobile than in the past, and more likely to be empoyed in one place for a short time. That situation favors renting over owning.

I recently posted on my own blog about this very thing after I heard pop financial adviser, Suze Orman blather on national TV that she has completely reversed herself on the benefits of home ownership and things people are better off being renters!

I did very well with one house because I bought it for $175,000 and 10 years later, listed it for $615,000 and it sold for $612,500! Amazing. That was in 2005. And then I paid cash for my next house at $475,000, but if I were to list it now, it would be in the $280's. If what you are saying is correct, then it would behoove me to hang onto it for a few more years. I had it listed for 3 months recently, wanting to relocate and it didn't sell, so I'll hold off on my relocation plans and continue to visit where I wanted to move to to be near family. I'm only 58. I'm also contemplating renting it too, but to sell now when prices are bottoming out, just doesn't make sense, unless it were for some kind of an emergency. I visit my family 3x a year so that's working out pretty good for us.

Who is going to be able to afford a house? The way companies keep cutting wages and pocketing the profits, no one will ever be able to save enough for a down payment, let alone make enough for monthly payments, food and saving for their kids education. Look around. Most of the houses belong to middle-class blue and low level white collar workers. These are the people who work in gas stations, supermarkets, construction, and the such....jobs that no longer earn a livable income because the companies that they work for won't pay them an honest days wage and won't provide any health care. They take the profit and leave the government to pay for their welfare and health care with tax money that is non-existent because most people don't earn enough to pay taxes! If housing prices go up, who can afford it? The skilled worker? Who is that skilled worker? Look around most people aren't that "skilled" what ever that means. Until wages for the middle class rise or at least keep up with inflation, i.e. housing prices, very few people will be able to afford a house.

About Me

I’m a Baby Boomer, part of the pig-in-a-python demographic group that has brought so many changes to America – and will continue to do so until we cash our last Social Security check. I had a typical baby boomer career. I attended college, went to business school, worked for several companies, then in my mid-50s was laid off. Meanwhile, I got divorced, and my two kids left for college. Now I live with my significant other, B, who has two children of her own. We live in the New York area, a convenient stopover for our four peripatetic 20-somethings. And I produce this blog Sightings Over Sixty which covers health, finance, retirement – concerns of people who realize that somehow they have grown up.